Chapter 20 Summary
Gross Domestic Product (pp. 486–470)
• GDP, or gross domestic product, is the market value of all the final goods and
services produced in a country during a given period.
• Afinal good is an item that is bought by its final user, and it contrasts with an
intermediate good, which is a component of a final good.
• GDP is calculated by using either the expenditure or income totals in the circular
• Aggregate expenditure on goods and services equals aggregate income and GDP.
Measuring Canada’sGDP (pp. 471–473)
• Because aggregate expenditure, aggregate income, and the value of aggregate
production are equal, we can measure GDP by using the expenditure approach or
the income approach.
• The expenditure approach sums consumption expenditure, investment,
government expenditure on goods and services, and net exports.
• The income approach sums wages, interest, rent, and profit (and indirect taxes
less subsidies and depreciation).
• Real GDP is measured using a common set of prices to remove the effects of
inflation from GDP.
The Uses and Limitations of Real GDP (pp. 474–479)
• Real GDP is used to compare the standard of living over time and across
• Real GDP per person grows and fluctuates around the more smoothly growing
• Incomes would be much higher today if the growth rate of real GDP per person
had not slowed during the 1970s.
• International real GDP comparisons use PPP prices.
• Real GDP is not a perfect measure of the standard of living because it excludes
household production, the underground economy, health and life expectancy,
leisure time, environmental quality, and political freedom and social justice.
Chapter 21 Summary
Employment and Unemployment (pp. 490–493)
• Unemployment is a serious personal, social, and economic problem because it
results in lost output and income and a loss of human capital.
• The unemployment rate averaged 7.6 percent between 1960 and 2007. It increases
in recessions and decreases in expansions.
• The labour force participation rate and the employment-to-population ratio have
an upward trend and fluctuate with the business cycle.
Unemployment and Full Employment (pp. 494–497) • The unemployment rate is an imperfect measure of the underutilization of labour
resources because it excludes some underutilized labour and some unemployment
• The unemployment rate underestimates the underutilization of labour resources
because it excludes marginally attached workers and part-time workers who want
• Some unemployment is unavoidable because people are constantly entering and
leaving the labour force and losing or quitting jobs; also firms that create jobs are
constantly being born, expanding, contracting, and dying.
• Unemployment can be frictional, structural, or cyclical.
• When all unemployment is frictional and structural, the unemployment rate equals
the natural unemployment rate, the economy is at full employment, and real GDP
equals potential GDP.
• Over the business cycle, real GDP fluctuates around potential GDP and the
unemployment rate fluctuates around the natural unemployment rate.
The Price Level and Inflation (pp. 498–503)
• Inflation is a problem because it redistributes income and wealth and diverts
resources from production.
• The Consumer Price Index (CPI) is a measure of the average of the prices paid by
urban consumers for a fixed basket of consumer goods and services.
• The CPI is defined to equal 100 for a reference base period 梒 urrently 2002.
• The inflation rate is the percentage change in the CPI from one period to the next.
• Changes in the CPI probably overstate the inflation rate because of the bias that
arises from new goods, quality changes, commodity substitution, and outlet
• The bias in the CPI distorts private contracts and increases government outlays.
• Alternative price level measures avoid the bias of the CPI but do not make a large
difference to the measured inflation rate.
• Real economic variables are calculated by dividing nominal variables by the price
Chapter 22 Summary
The Basics of Economic Growth (pp. 516–517)
• Economic growth is the sustained expansion of production possibilities and is
measured as the annual percentage rate of change of real GDP.
• Sustained growth transforms poor nations into rich ones.
• The Rule of 70 tells us the number of years in which real GDP doubles—70
divided by the annual percentage growth rate.
Economic Growth Trends (pp. 518–520)
• Between 1926 and 2007, real GDP per person in Canada grew at an average rate
of 2.1 percent a year. Growth was most rapid during the 1960s and slowest during
the 1980s. • Real GDP per person has grown slightly faster in the United States than in Canada
and the four big countries of Europe.
• The gap in real GDP per person between Canada and Central and SouthAmerica
has narrowed. The gaps between Canada andAfrica and Central Europe have
How Potential GDPGrows (pp. 521–526)
• The aggregate production function and equilibrium in the aggregate labour market
determine potential GDP.
• Potential GDP grows if the labour supply grows or if labour productivity grows.
• Only labour productivity growth makes real GDP per person and the standard of
Why Labour Productivity Grows (pp. 526–530)
• Labour productivity growth requires an incentive system created by firms,
markets, property rights, and money.
• The sources of labour productivity growth are growth of physical capital and
human capital and advances in technology.
• Growth accounting measures the contributions of capital accumulation and
technological change to the growth of labour productivity.
• During the productivity growth slowdown of the 1970s, technological change did
not stop growing but its focus changed to coping with energy price shocks and
Growth Theories and Policies (pp. 531–535)
• In classical theory, real GDP per person keeps returning to the subsistence level.
• In neoclassical growth theory, without further technological change, diminishing
returns to capital bring economic growth to a halt.
• In new growth theory, economic growth persists indefinitely at a rate determined
by decisions that lead to innovation and technological change.
• Policies for achieving faster growth include stimulating saving and research and
development, encouraging international trade, and improving the quality of
Chapter 23 Summary
Financial Institutions and Financial Markets (pp. 544–548)
• Capital (physical capital) is a real productive resource; financial capital is the
funds used to buy capital.
• Gross investment increases the quantity of capital and depreciation decreases it.
Saving increases wealth.
• The markets for financial capital are the markets for loans, bonds, and stocks.
• Financial institutions ensure that borrowers and lenders can always find someone
with whom to trade.
The Market for Loanable Funds (pp. 548–554)
• Investment in capital is financed by household saving, a government budget
surplus, and funds from the rest of the world. • The quantity of loanable funds demanded depends negatively on the real interest
rate and the demand for loanable funds changes when profit expectations change.
• The quantity of loanable funds supplied depends positively on the real interest
rate and the supply of loanable funds changes when disposable income, expected
future income, wealth, and default risk change.
• Equilibrium in the loanable funds market determines the real interest rate and
quantity of funds.
Government in the Market for Loanable Funds (pp. 555–556)
• Agovernment budget surplus increases the supply of loanable funds, lowers the
real interest rate, and increases investment and the equilibrium quantity of
• Agovernment budget deficit increases the demand for loanable funds, raises the
real interest rate, decreases investment in a crowding-out effect, and decreases the
equilibrium quantity of loanable funds.
• The Ricardo-Barro effect is the response of rational taxpayers to a budget deficit:
Private saving increases to finance the budget deficit. The real interest rate
remains constant and the crowding-out effect is avoided.
The Global Loanable Funds Market (pp. 557–559)
• The loanable funds market is a global market.
• The equilibrium real interest rate is determined in the global loanable funds
market and national demand and supply determine the quantity of international
borrowing or lending.
Chapter 24 Summary
What Is Money? (pp. 568–570)
• Money is the means of payment. It functions as a medium of exchange, a unit of
account, and a store of value.
• Today, money consists of currency and deposits.
The Banking System (pp. 571–575)
• The banking system consists of the depository institutions (chartered banks, credit
unions and caisses populaires, and trust and mortgage loan companies), the Bank
of Canada, and the payments system.
• Depository institutions provide four main economic services: They create
liquidity, minimize the cost of obtaining funds, minimize the cost of monitoring
borrowers, and pool risks.
• The Bank of Canada is the central bank of Canada.
How Banks Create Money (pp. 575–577)
• Banks create money by making loans.
• The total quantity of money that can be created depends on the monetary base, the
desired reserve ratio, and the currency drain ratio.
The Market for Money (pp. 578–581)
• The quantity of money demanded is the amount of money that people plan to
hold. • The quantity of real money equals the quantity of nominal money divided by the
• The quantity of real money demanded depends on the nominal interest rate, real
GDP, and financial innovation.Arise in the nominal interest rate brings a
decrease in the quantity of real money demanded.
• In the short run, the Bank of Canada sets the quantity of money to hit a target
nominal interest rate.
• In the long run, the loanable funds market determines the real interest rate and the
quantity of money determines the price level.
The Quantity Theory of Money (pp. 582–583)
• The quantity theory of money is the proposition that money growth and inflation
move up and down together in the long run.
• The Canadian and international evidence is consistent with the quantity theory, on
Chapter 25 Summary
Currencies and Exchange Rates (pp. 594–596)
• Foreign currency is obtained in exchange for domestic currency in the foreign
• The nominal exchange rate is the value of one currency in terms of another
• The real exchange rate is the price of one country’s real GDP in terms of another
country’s real GDP.
The Foreign Exchange Market (pp. 597–600)
• Demand and supply in the foreign exchange market determine the exchange rate.
• The higher the exchange rate, the smaller is the quantity of Canadian dollars
demanded and the greater is the quantity of Canadian dollars supplied.
• The equilibrium exchange rate makes the quantity of Canadian dollars demanded
equal the quantity of Canadia